In his seminal book, “Capital in the twenty-first century”, Thomas Piketty examined the mechanisms for wealth accumulation and found inheritance to be the key factor. Inheritance patterns then assumed a pivotal role in wealth transfer from poor to rich and therefore was the basis for establishing the level of equality or inequality in a society.

Given Canada’s debt and job quality trends, we can expect inequality to continue to rise. These are structural mechanisms and no matter how much government attempts to reverse or slow the trend to inequality with artificial legislated reactive measures, the slide to inequality will continue until the root problems are fixed.

Many business and economic commentators laud our inflated housing prices as “asset enhancement” a phrase used to replace the discredited “wealth effect” that led to the financial collapse in the United States.

Taxing Your Children – An Example of Negative Inheritance

Mom and Dad buy a house in the 1970s for $30,000 and sell it in 2015 for $700,000. Great! $670,000 in free money!! A trip around the world and help the kids out a little bit.

But wait! The kids have to buy their own home. If mom and dad very generously give them $100,000 for a down payment, the kids will still have to pay off $600,000 over 25 years. The interest cost of doing this would be $528,000 if interest rates stayed at 3% for 25 years. If the rate was constant at 5.8%, the interest cost would be $774,000 and at 8%, $851,000.

Added to the principal, that means that the $670,000 windfall profit (non-taxable) that the parents made will cost the kids between $1.13 million and $1.45 million to pay off with after-tax income. This means they have to earn in the neighbourhood of (at 35% income tax rate) between $1.74 million and $2.23 million to cover the housing cost increase which was such a windfall for their parents. Over the 25 year life of the mortgage, they will have to earn between $70,000 and $89,000 annually to pay just for the purchase of the house.

In effect, the children pay for their parents’ windfall 3 times over. That is a generational tax.

  • At 3% interest and 25-year amortization, the interest charges are 88% of the principal
  • At 5.8% interest  –  129% of the principal
  • At 8% interest  –  142% of the principal 

Other hand-me-downs are a financial system created in lockstep with the twin once-in-a-species- events of the discovery and exploitation of two new huge resource-rich continents and incredibly rich sources of energy.  The growth dependent GDP and fractional banking system along with printed currency and international monetary exchange were supposed to grease the wheels of the real wealth creation system.  Now they have pushed aside and obscured the real economy and replaced it with an unstable witch’s brew of printed paper promises. The tool has become the master.

Some of the legacy costs the boomer generation will be handing down: 

  1. Narrow-based economy
  2.  Unsustainable debt at all levels
  3. Unsustainable consumption patterns
  4. Low-income jobs
  5. Declining per capita resource base
  6. Rigid political infrastructure
  7. Misleading management tools – economic and social metrics
  8. Embedded interest groups
  9. Corrupted information system
  10. Unpaid internships
  11. Legacy costs: High costs of transition of all infrastructure – private, industrial, public to low energy consumption  ie greening of our infrastructure
    1. Oil sands cleanup
    2. Fracking cleanup
    3. Old oil well cleanup
    4. Mine cleanup
  12. High costs of transition of all infrastructure – private, industrial, public to low energy consumption  ie greening of our infrastructure.
  13. High costs of re-configuring our cities and distribution systems and way of life for a low footprint, low energy consumption
  14. The huge social costs of re-defining progress and developing tools and metrics to represent the new paradigm and new goals 

The boomer generation has not been a good steward of the future interests of the generations to follow. This puts a great challenge before coming generations and one that they will struggle to overcome.  The first responsibility of any generation is to recognize that they do have responsibilities to future generations.  Although boomers have been very slow in developing this awareness, it is not too late to at least start to identify and deal with many of the problems we have left on the plates of our children.